Contributed by: Zacks Market Commentaries (http://www.zacks.com/) -

Yesterday CME Group Inc. (CME), the largest U.S. futures exchange operator, announced the launch of two thermal coal swap futures contracts, China coal swap futures and Coal Newcastle FOB. The futures will be traded over-the-counter (OTC) from September 12, 2011.

Accordingly, the two OTC contracts will be financially settled and will be traded in lot sizes of 1000 tonnes each. CME had earlier cleared 14 other coal swap contracts and the new contracts will raise the tally to 16.

China is expected to be the major purchaser as the country is the world’s second largest importer of both thermal and coking coal. Last year, China had purchased 81.6 million tons of thermal coal and 44 million tons of metallurgical coal, accounting for 11.4% and 17.7%, respectively, of global purchases. Thermal coal is used in power plants while metallurgical coal is used in the manufacture of steel.

The price of coal has become highly volatile in Asian countries after the Japan earthquake reduced the demand from the country. It is expected that China will use the new coal swap futures contracts as hedging instruments against price volatility and will eventually also adopt index pricing for buying coal.

Index pricing was launched in Europe five years ago. However, currently coal buyers are reluctant to use index pricing, but as in the case of iron ore, the initial resistance is expected to wear off as index pricing is the natural way forward.

CME carries a Zacks #3 Rank, which translated into a short-term Hold rating. The main competitors of the company are Nasdaq OMX Group Inc. (NDAQ) and CBOE Holdings Inc. (CBOE).

On Thursday, the shares of CME closed at $265.61, down 0.57%, on the New York Stock Exchange.

 
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